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Tuesday
Sep302014

Collective Action: A new approach to combat corruption (Part 6)

In parts 4 and 5 of this series, I outlined how awareness-raising activities, education and declarations are an important step towards changing the game in markets, by making sure there is a common understanding of what corruption is.

This week, I'll move up the pyramid from “Declarations and Joint Activities” to “Standard Setting Initiatives”.

Standard setting initiatives are a natural development of the declarations and joint activities that we examined earlier. They most often take the form of codes of conduct in particular markets. In this and the next two parts I’ll be looking at the strengths and weaknesses of anti-corruption codes of conduct, and the challenges in setting them up and implementing them.

In fact ethical codes of conduct have been around for many years. In the laissez-faire nineties, companies compensated for the lack of regulation from government by creating their own voluntary self-regulation.

The issues they confronted went beyond corruption -- the codes created new international standards on child labour, human rights, environment, social responsibility and specific ethical issues connected with particular industries. They included clauses on corruption, which underlies many of these issues, as part of a broad raft of commitments to responsible business practices.

What’s new in our time is the increasing focus of codes on anti-corruption and their relevance in emerging markets where rule of law and regulation remain weak. Interestingly codes of conduct continue to thrive in developed markets, even though the regulatory environment has changed radically.

Essentially codes of conduct are efforts by market leaders to establish the rules of the game by creating a level playing field in a particular market or business sector. Market players participate in creating the code of conduct, and then voluntarily sign up to them.

Codes differ from the declarations we wrote about earlier in that failure to comply can result in a signatory being expelled from the initiative. And companies which simply don’t “get it” will not be allowed in. The theory is that companies which are not compliant will undermine their reputation in the market and society, may be denied opportunities to bid in public tenders, and will either raise their game or eventually get squeezed out of the market. Some codes of conduct have third party monitoring to ensure compliance and to adjudicate where necessary.

There are many examples of anti-corruption codes of conduct - you can look at most industries and you’ll find a code of conduct which, on paper at least, has enough teeth to have ensure the highest standards of behaviour. Take, for example, defence and aerospace (Global Principles of Business Ethics, extractive industries (Extractive Industries Transparency Initiative), banking (Wolfsberg Principles) and  healthcare (International Federation of Pharmaceutical Manufacturers and Associations Code of Practice).

Some codes are global, others regional, yet others are at a national level (increasingly in emerging markets). Some are not restricted to particular sectors, but to sub-groups within industries, or types of company such as SMEs.

When it comes to their effectiveness, there is no doubt that codes of conduct in a particular industry can change corporate behaviour for the better.

Companies in the same sector face the same corruption challenges; there’s a limited number of players, making it easier to reach agreement on standards and monitoring compliance; they already meet regularly in a controlled environment through their industry associations to discuss technical standards, agree lobbying positions toward government, and raise the public profile and the reputation of the industry.

For companies that have signed up to codes of conduct, the cost of deviating from the standard are high, even before the regulatory burden of law enforcement comes crashing down upon them.

In the context of weak regulation, voluntary codes of conduct have certainly helped to create common standards, and some degree of consensus amongst players about what is acceptable behaviour. It’s difficult to measure, but it’s safe to assume that corporate behaviour would have been significantly worse over the last decades without them.

The limitations of codes of conduct will be the topic of my next post.

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Brook Horowitz is a contributing editor of the FCPA Blog. He's the CEO of IBLF Global, a not-for-profit promoting responsible business practices worldwide.